The 15 year myth has been going on for a while mostly fueled by Quicken Loans. They have been sending out content via social sites and commercials saying that the new fad in Mortgage is to have a 15 year loan. While the 15 year loan is a great option in certain situations but is NOT for everyone. In fact, in most cases it is not your best option.
There are definitely some advantages to a 15 year mortgage. The primary advantage is that it will save you a ton of money on interest over the life of the loan as it cuts your “term” in half as compared to a 30 year loan. A 15 year loan usually has a lower interest rate because you are a lower risk to the bank. However, there are a lot of factors in life that can change your financial well being. A 15 year loan can put you into a situation where you have now locked yourself into a higher payment and don’t have the flexibility to lower your payment.
Let’s take a look at what I mean by that. Let’s say you’re getting a $270,000 loan and putting 10% down which makes for a purchase price of $300,000. We are going to use today’s par rates for a conventional loan and that you have a 680 credit score.
By the Numbers
30 Year Loan – Rate = 4.5% and has a principal and interest payment of $1,368.05
15 Year Loan – Rate = 4.125% and has a principal and interest payment of $2,100.15
The total interest you paid on the 30 year loan if you didn’t make any additional payments or pay above the minimum would be $222,498.12
The total interest you paid on the 15 year loan if you didn’t make any additional payments or pay above the minimum would be $92,540.24
You saved yourself $129,957.88 by going with a 15 year loan.
However, as stated before we all know that life can put a lot of barriers and speed bumps in front of you. What happens if you locked yourself into a 15 year loan. You still have to make that $2,100 payment every month. Where as, if you went with the 30 year loan but made the payment every month like you were on the 15 year loan you can still save yourself almost the same amount of money but if you were to lose your job you can reduce the amount you’re paying every month from $2,100 to $1,368.
I’m not saying you shouldn’t save yourself the money. I’m saying you should treat your 30 year loan like it’s a 15 year loan and make that monthly payment when you can (and hopefully that’s the full term). Now when life throws you a curve ball you have the flexibility to reduce your payment. Now you have not put yourself in a situation where you have to drain your bank account, possibly need to sell or even refinance because you locked yourself into a higher payment and didn’t stay flexible.
I hope you found this information helpful and gives you food for thought when considering what term you want to go with. Again, i’m not saying the 15 year loan shouldn’t be an option but it is a very situational loan for those who have a lot of extra monthly income and are in a situation where they have a sizable nest egg to be able to get through those major speed bumps that can and do happen. Please feel free to call me to discuss or click the link below and submit your information to find out what loan term is best for you!